How Obama wants to sweeten the bailout for insurers under Obamacare

In a little-noticed regulation issued the week of Thanksgiving, the Department of Health and Human Services proposed tweaking a program within President Obama's health care law to funnel additional money to insurers.

The relevant Obamacare provision, known as the “risk corridors” program, was one of several measures in the law aimed at stabilizing the insurance market as it undergoes dramatic changes in 2014.

Though little remarked-upon during the contentious congressional debate over the health care law in 2009 and 2010, the program may now be the vehicle for a massive bailout of insurers who stand to rack up higher-than-expected costs due to the rocky rollout of Obamacare.

Starting in January, insurers will be forced to offer coverage to individuals suffering from pre-existing conditions. When drafting the legislation, lawmakers wanted to make sure that individual insurers didn’t worry about getting stuck with a disproportionate share of very sick enrollees with high medical costs. If that were to happen, it could motivate insurers to attempt to manipulate plan offerings so as to “cherry pick” the healthier participants. So lawmakers included several provisions to guard against this possibility, one being the risk corridors.

A simple way of explaining the risk corridors program is that it requires insurers to estimate their expected level of costs for providing health insurance in the following benefit year. Those insurers who have much lower costs than expected must pay a certain amount to the federal government. Those who have much-higher-than-expected costs receive money from the federal government.

As I wrote previously, the Congressional Budget Office effectively never included the program in its cost estimate for Obamacare because it assumed that the contributions from insurers would equal the payments to insurers. In other words, the CBO assumed it would be a wash and have no impact on federal deficits.

But that assumption is beginning to look a lot less likely. The program was designed to protect individual insurers against major losses, but it did not anticipate industry-wide losses, which look a lot more likely now given the implementation problems that have plagued Obamacare and have possibly deterred younger and healthier Americans from purchasing insurance. Thus, far from having no deficit impact, American taxpayers could be on the hook for a major insurance bailout.

And that bailout is about to get bigger.

In describing Obama's proposed “administrative fix” to calm the backlash stemming from millions of Americans receiving letters canceling their insurance policies for not complying with Obamacare, HHS vowed to explore ways to use the risk corridor program to provide even more financial relief to insurers.

Obama's “fix,” of course, didn't really fix anything -- he merely said that he wasn't going to enforce his own law, which required insurance policies to cover certain benefits. He put the onus on state regulators to choose whether they'd allow insurers to continue to issue illegal policies. Insurers have been concerned that un-cancelling plans at this late date could lead to a different mix of customers for plans offered on the new health care exchanges, thus driving up costs for insurers -- hence, the HHS promise of additional financial relief.

Initially, it was unclear how HHS would alter the program to feed more money to insurers. The text of Obamacare makes clear the payment formula for the risk corridors program: If an insurer's losses are 103 percent to 108 percent over the target amount, the federal government would absorb half of those losses -- and for losses that exceed 108 percent, the government would cover 80 percent.

But as University of Michigan law professor Nicholas Bagley explained in a post at the health care blog the Incidental Economist, though the payment formula itself is laid out clearly in the law's text, HHS regulators are given discretion as to what qualifies as a “loss” to insurers for the purposes of the program.

Insurers are allowed a certain amount of profit and administrative costs relative to what they pay out in claims. In regulations issued Nov. 25, HHS proposes using this discretion to allow insurers to claim more profit and administrative costs in states that have gone along with Obama's administrative fix on cancelled plans.

HHS declined to provide a cost estimate of the rule change. “Because of the difficulty associated with predicting state enforcement of 2014 market rules and estimating the enrollment in transitional plans and in (Qualified Health Plans) we cannot estimate the magnitude of this impact on aggregate risk corridors payments and charges at this time.”

Alex Conant, a spokesman for Sen. Marco Rubio, R-Fla., who has introduced legislation to repeal the risk corridors program, responded to the proposed rules change in an email to the Washington Examiner: “What we're finding out now through the administration's actions is that because the structure of the Affordable Care Act, and their subsequent destabilizing market actions, a bailout of insurance companies is becoming more and more likely. While 'risk corridor' programs are not inherently bad when they are structured in a budget-neutral way, the newly released regulations show that the administration is likely to provide another bailout to another industry.”

For more on how Obamacare's regulations, subsidies and taxes build on each other, read my colleague Tim Carney's latest column.

UPDATE: In the House of Representatives, Rep. Tim Griffin, R-Ark., has introduced a companion bill to Rubio's.